New law caps retention on public works projects at 5%

On October 9, 2011, Governor Brown signed SB 293 in to law. SB 293 addressed a variety of issues in public works related statutes, including prompt payment periods between a prime contractor and subcontractor, procedures for filing 20-day preliminary notices, and procedures for making claims on payment bonds. Most noteworthy, however, is the adoption of a new Public Contract Code section 7201 which caps retention of progress payment for all public works projects at 5%.

The newly created section 7201 applies to "public entities," which is defined broadly to include essentially all public agencies, including: "the state, including every state agency, office, department, division, bureau, board, or commission, the California State University, the University of California, a city, county, city and county, including charter cities and charter counties, district, special district, public authority, political subdivision, public corporation, or nonprofit transit corporation wholly owned by a public agency and formed to carry out the purposes of the public agency."

The cap on retention is stated plainly in section 7201(b)(1) as follows: "The retention proceeds withheld from any payment by a public entity from the original contractor, by the original contractor from any subcontractor, and by a subcontractor from any subcontractor shall not exceed 5 percent of the payment. In no event shall the total retention proceedsd withheld exceed 5 percent of the contracto price."

Prior to this law, most agencies had significant flexibility as to the amount of retention withheld. Commonly, agencies withheld 10% of progress payments, sometimes reducing that amount to 5% toward the end of a project. This new law removes any flexibilty in establishing the amount of retention being withheld, and will reduce the leverage agencies have over their contractors to complete projects satisfactorily. Undoubtedly, this will not be a welcome development for public agencies. As three previous governors have argued while vetoing similar bills, this new requirement will hamstring public agencies and limit their ability to protect public resources.

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